Notes on “India’s Footwear Industry: A Reality Check”

Gulzar Natarajan has an excellent, excellent blogpost up on this blog, Urbanomics, titled “India’s Footwear Industry: A Reality Check“. In what follows, I make notes for myself about the post in terms of what it reminds me of, what I did not understand, and additional links or resources I learnt about while reading the post.

  • “The footwear industry makes 2 billion pairs, of which 286 million pairs were exported last year. It employs 2-4 million people, the vast majority as informal and contract labour and/or hired through manpower agencies and at very low salaries in the range of Rs 6000-10000.”
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    Reading more about this helped me land up on a website called worldfootwear.com, and I learnt of the existence of the 2019 World Footwear Yearbook. In 2018, the world manufactured 24.2 billion pairs of footwear, and the industry grows at about 3% a year in normal circumstances – give or take a few points.
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    90% of all shoes manufactured in the world come from Asia. That makes sense, as Asia is responsible for 54% of the world’s demand for footwear on an annual basis.
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    China alone was responsible in the year 2018 for about 70% of the world’s exports.
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    All of these snippets come from this page.
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  • “As a summary, the current state of the Indian footwear industry is characterised by small scale, very low productivity, low automation, stagnant growth, and pervasive informality.”
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    One of the reasons I liked reading this blogpost so much is because while I get to learn a lot about the footwear industry in India, I also get to reflect on how so much of what is true for the footwear industry is also true of other industries in India. The inability to break out of the small scale (about which much more below), the low levels of automation and the pervasive informality are to be seen in almost all industries in India. There is, perhaps, a sociological point to be made about whether the causality runs from the inability to scale to informality or the other way around (or indeed, both!), but we’ll save that for another day.
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  • “The highest value market segment is the mainstream global branded manufacturing in non-leather footwear. But this is a segment that has proved elusive even to the Chinese manufacturers, especially in the global market. It may well be outside the reach of Indian manufacturers, unless some particular brand breaks out due to a combination of exceptional entrepreneurship and even more exceptional good fortune.”
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    As you will learn later on in this blogpost, Gulzar Natarajn seems to be as big a fan of “How Asia Works” as I am, and perhaps a bigger one. One of my favorite questions to ask in class as a consequence of reading that book is this one “Name one globally recognized brand from ASEAN nations”. This applies to India, and to a lesser extent to China as well – that’s basically the point that is being made here. Being a manufacturing and export powerhouse is not the same as building globally recognized brands.
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    This brings to mind both the “manufacturing smile” as well as Peter Thiel’s distinction between technology and globalization. It also raises important questions about what paths India should choose between for the next two decades when it comes to manufacturing policy, but again, more on that later.
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  • “The next best alternatives may be to increase their share of the Indian branded manufacturing segment and become large scale contract manufacturers for global brands. This is the playbook of the Chinese footwear industry.”
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    Have you read Shoe Dog, by Phil Knight? Don’t know who Phil Knight is? Well, have you heard of Nike? Read especially the bits about his travels in Japan, in search of contract manufacturers.
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  • Gulzar Natarajan’s first recommendation when it comes to the footwear industry in India is to be a contract manufacturing hub. Easier said than done! (To be clear, that is not a criticism of the point he makes – it is a reinforcing of his message, and also a reminder to readers that India is not quite ready to this just yet, for a variety of reasons).
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    One of these reasons is actually mentioned in a more recent post by the same author, regarding Vietnam’s recent agreement with Europe about tariffs on Vietnam’s exports.
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    What about India and the EU, you ask?
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    “Negotiations for a comprehensive Free Trade Agreement (FTA) between the EU and India were launched in 2007 and suspended in 2013 due to a gap in the level of ambition between the EU and India.”
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  • The last bullet point was about India making for the world. Gulzar Natarajan goes on to point that we must also think about India making footwear for India.
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    “Any strategy to increase local branded manufacturing to capture this market has to focus on Make for India (and not Make in India for the world). This does not mean skimping on quality, but competing with the imported manufacturers by gradually improving productivity. This can be done only by efficiency gains to cut costs – improving labour productivity, local component manufacturing, greater automation (not full automation, but enough to enhance labour productivity), and economies of scale.”
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    He speaks about each of these four points: improving labor productivity, local component manufacturing, greater automation and economies of scale in his blogpost, click here to read those specific parts of the post.
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  • Gulzar Natarajan speaks about manufacturers having no incentive to train workers:
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    “In order to train the workers, the manufacturers have to incur the cost of trainings as well as bear their salaries. They have no incentive to bear this cost, even if a couple of months trainings can suffice.”
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    Well, maybe so. But this does remind me of an excellent excerpt from one of my favorite books to recommend to students about macroeconomics – Tim Harford’s “The Undercover Economist Strikes Back
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    The section on Ford and superior wages is especially worth reading. Perhaps I am missing an obvious point (which is all too possible), but I can’t help but wonder why Ford’s strategy cannot work in India – whether on footwear or elsewhere.
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  • “While capital investment subsidies are in general not a very desirable thing, some form of fiscal incentives may be necessary to encourage the smaller and medium sized manufacturers to increase their level of automation. Though targeting and tailoring these subsidies will be challenging, the government could consider a subsidy that is linked to some performance, either exports or on higher productivity growth.”
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    For those of you who have read the book, the reference is unmistakable. And for those of you who haven’t, I’ll say it again: How Asia Works is mandatory reading.
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  • “The Government of India already has specialised institutions on footwear design and leather research. There is a need to have them play a much more proactive role in supporting with supply of trained and quality designers. There may also be a need for an arrangement to access good quality designers at a reasonable cost. An incentive compatible subsidy mechanism may be required here too. This should be complemented with colour and fashion forecasting support.”
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    I actually find myself in disagreement here with Gulzar Natarajan. Reading this post made me aware of the Best Footwear Design and Development Institute (yes, it really exists), but isn’t this an example of government overreach? Facilitating a college like this is one thing, actually having government run it is quite another, no?
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    But the solution is in the quote above: incentive compatible subsidy mechanism. Another recommendation in this regard: please read In The Service of the Republic, by Vijay Kelkar and Ajay Shah. My notes on this book can be found here. Providing subsidies that are designed to keep incentives (preferably for both parties) in mind is a surprisingly powerful idea!
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  • “For sure, the industry will not collapse, but will meander along business as usual. There may even be the occasional mutant success. But there cannot be a sectoral exit out of the current low productivity and stagnation trap.”
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    It is oddly depressing to have Gulzar Natarajan be pessimistic about the growth prospects for this sector, particularly because it is so hard to disagree with him on this account.
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  • He is against tax breaks, particularly because of the inevitable equilibrium in terms of the lobbying that will take place.
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  • “The conventional wisdom in this regard blames poor quality of infrastructure, restrictive labour laws, difficulty in assembling large land parcels, high cost of capital, and pervasive red-tape. These are all, in general, factors of concern.”
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    My favorite book to recommend to students in this regard is Bhagwati and Panagariya’s book “Tryst with Destiny“. And of course, in terms of policy prescriptions, Gulzar Natarjan’s own book “Can India Grow?
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  • Gulzar Natarajan has an extended section on the “innate charactersitics of entrepreneurs“. It is too long to excerpt, but it did remind me of an excellent paper on why productivity in India is so very low. Worth reading, especially if you are a student of micro, IO or India.
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  • “The impact of reforms like GST, while certainly beneficial in the long-run, may have ended up squeezing the vast majority of the small manufacturers. For a start, for these small manufacturers, the compliance costs in terms of hiring accountants and IT requirements are a non-trivial share of their profits. Then there is the structure of the GST tariffs – 18% for the components and 5% for the final product. This means that the manufacturers capital gets locked up as receivables for a long time. For small manufacturers, these costs are prohibitive.”
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    This point is a little weird. Let me explain what I mean when I say “weird”. I think almost every economist is aware of this issue, and has spoken about it repeatedly. But the level of awareness otherwise is very, very low. Again, the GST is a great idea with poor implementation. The unique nature of India’s economy (a blend of formal and informal along the supply chain for many, many things) makes the implementation worse.
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  • And perhaps the coda to this excellent blog post, and for me the most important part:
    “It is important for the Government to play an important role if the footwear industry can move significantly forward. The market by itself is unlikely to have the incentives or the capacity to manage that.”
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    This is a classically Studwellian recommendation. The problem is that the “no but markets will work if you let them” brigade will never accept this line of reasoning. Additionally, there are far too many people in India (especially within government) who will interpret this to mean that government needs to actively participate in the actual ecosystem by getting into manufacturing and allied activities.
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    And hardly anybody will get what I think is the actual Studwellian message. Government needs to carefully design incentive compatible subsidy mechanisms and make it clear to producers that it (the government) carries a very, very big stick – and that it is not afraid to use it. And well, if push comes to shove, actually use it. Please, read How Asia Works!

Daaru in times of the lockdown

Simran, a student at the Gokhale Institute asks a series of question about the topic du jour:

I had a query in regard to the news that have been doing rounds  – “Why did government order opening of wine shops?”

She asks other, related questions further on in her email, and I’ll get to them, but let’s go with this first.

Now, I am not privy to the decision-making process of either the state or the central governments, but there are two immediate responses that come to mind about the why: one, there is certainly demand for it!

And two, revenues *should* go up with the sale of alcohol. The reason I say should is because there have been arguments made about how the tax that the state government collects is when the distributor sells to the retailer, rather than when the consumer buys from the retailer. I am unable to find a report online of this nature, but I have certainly heard that argument being made. And that as a consequence, opening up liquor shops won’t have that much of an impact on government coffers, because tax has already been collected.

Very briefly, this argument doesn’t hold for at least two reasons. First, because although it is true that part of the tax that is paid is in the nature of an excise duty (that is, taxable when it leaves the manufacturer’s location), there are a whole host of other duties, taxes and cesses that are charged in addition. For instance, did you know that if you raise a glass in Uttar Pradesh, you are doing your bit to take care of abandoned cattle? Other states also impose other taxes – demand, as we are seeing right now, is fairly inelastic, so of course you should expect governments to tax as much as possible.

Second, and to my mind more importantly, never confuse stocks with flows! Forgive the pun, but once alcohol sales start flowing, the chain of taxation will kick into gear at all points. As per this report, all states and union territories put together expected to earn INR 1,75,000 crores (or thereabouts) from the sale of alcohol last year. The flow (and forgive the pun again) is important!

So, simply put, it is about the money.

Simran further goes on to ask:

The Delhi government announced a 70% ‘special coronavirus tax’ on alcohol.

Charging such a huge tax from a daily wage earner does sound cruel. Government claims that the tax will dissuade the poor from drinking but past reports claim that habitual drinker will never quit and this will just shrink the quantity of food he and his family consumes.

I was wanting to delve deeper into this topic –
Alcohol and its effect on poverty or is it
Poverty and its effect on consumption of Alcohol.

A series of tricky questions indeed! Let’s get to them one by one:

  1. I can think of at least two reasons behind the Delhi government’s decision. First, the high price might deter at least some folks from queuing up, and second, revenues will go up. Unfortunately, these reasons are contradictory! If crowds go down because of the high prices, surely revenue cannot go up at the same time? The answer, as any econ student will tell you, lies in computing the elasticity of demand for alcohol. See this video, for instance, on the topic.
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    Will the habitual drinker quit with such high prices under these circumstances?
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    Honest answer: who knows? You can spend the rest of your lives drawing diagrams and scribbling questions, but at the individual level, we simply don’t know. There are too many variables for us to get a reasonable answer (changes in income, length of the lockdown, the level of desperation for alcohol, the urge to stockpile in face of an uncertain future, for starters). The habitual drinker will certainly think twice, but beyond that nothing useful can, or should, be said. That is my opinion. It is not quite the same topic, but read this article, written by Banerjee and Duflo (and read both of their books!)
  2. I have only glanced through the two links I am sharing here, but hope to read them in more detail later. The first is an exercise in calculating the price elasticity of demand for households in India, and the second is a collation of a lot of studies done on the topic, but it deserves its own separate point…
  3. … not least because writing this blog post helped me learn about the existence of the Institute for Alcohol Studies! (Dear folks at the IAS, let me know if you are in need of test subjects). They have a page on the impact of price on alcohol, and worries about conflict of interest aside, the report that alcohol is relatively price inelastic.
  4. Both studies report much the same thing, although of course a whole host of other factors also come into play (level of education, extent of addiction being just two obvious ones). But long story short, for a one percent increase in price, you should expect demand to go down by less than one percent.
  5. But that still doesn’t answer Simran’s question: does poverty cause one to consume alcohol, or does the consumption of alcohol cause poverty? My honest answer is that we simply can never know for sure, and it is probably both, but hey, nothing should get between a tricky, potentially unanswerable question and econometrics! Knock yourself out!

 

Thank you for the questions, Simran! I enjoyed answering them 🙂

 

A query on a column by Ajit Ranade

Shashank Patil, enthusiastic asker (it is my blog, and I say that it is a word) of questions, sends in this article, and asks the following questions:

  1. What are the possible difficulties with this?
  2. How does this weigh in with any other choice?

This promises to be a fairly long post, and for the sake of knowing where we are at any point of time, I am going to divide it into three major sections:

  1. The need for the stimulus
  2. Show me the money!
  3. What is the best choice out of all the options available?

The need for the stimulus

There’s four things that go into adding up our GDP: consumption, investment, government expenditure, and net exports (net simply means we deduct the rupee value of all of our imports from the rupee value of all of our exports, over one accounting year). But be careful, calculating GDP is surprisingly complicated!

During these times, good luck getting C, I and NX to be anything remotely related to good news, and so we’re almost certain to not have great GDP growth, or even growth at all. Unless el sarkar steps in. So when we ask for a fiscal stimulus, we’re basically saying the other components of GDP are near comatose, so government spending will have to take up the slack.

Maybe the government can build out way better health infrastructure than we have at present, like Andy Mukherjee says. Maybe we can provide clean drinking water, along with a whole list of excellent suggestions made by Shankkar Aiyyar. Direct money transfers to the poor is another idea. But for all of this to happen, we need to start at the basics: where is the money?

The government didn’t have enough money before the pandemic hit (that’s what a fiscal deficit means), and the problem is way worse now: much more money needs to be spent, and not enough money is coming in by way of tax revenue.

Ergo, all of the columns about how to raise the money that will need to be spent.

Show me the money!

There’s three ideas that I have liked so far:

  • Deepak Shenoy talks about a realignment of the liabilities side of the balance sheet of the RBI unlocking about INR 400,000 crores (thinking about numbers as big as this is an invitation to a migraine, but this is 4 trillion, unless I am mistaken. Please let me know if I am!). Let’s call this the DS method.
  • Andy Mukherjee talks about the government selling stakes in PSE’s (that’s Public Sector Enterprises). The details matter in this case: the sale will be to an SPV (Special Purpose Vehicle), which will finance the purchase by issuing bonds. When markets recover, sell the stake, and redeem the bonds. Method AM.
  • And finally, Ajit Ranade offers a pani puri instead of a puchka. That is to say, the same idea as Andy Mukherjee, but with a twist. Instead of the government stakes in PSU’s (undertaking, instead of enterprises) being sold to an SPV, he suggests selling it to the RBI as a repo transaction. That is, sarkar sells to RBI and gets money, but also gets to buy back the shares at the same amount plus an annualized interest rate of around 3%. That’s where the name repo comes from: short for repurchase. And yes, method AR.

What is the best choice?

So maybe this is just me getting old, and therefore more conservative, but I’d rank Deepak Shenoy’s suggestion third. There are two main reasons, although there are others. First, the RBI already gave out some cash last year (and Deepak Shenoy himself has a most excellent article about it. Link 3 in this post, and the others are worth reading too, especially number 5.  Bookmark CapitalMind.in if you haven’t already!). Second, maybe it makes sense to keep some of our powder dry, for who knows what other horrors wait for us in the future? If, god forbid, two years down the line we need more help, it would be better to use the DS method then – because good luck trying to convince folks of the value of PSU stakes after more two years of this.

Let me be clear: I am not saying that this will continue for two years. I’m saying we should be prepared.

Now, in a straight fight between AM and AR, well, which self-respecting Maharashtrian will pick puchkas over pani-puri? I’d plump for Ajit Ranade’s method, and for the following reasons:

  1. A repo transaction is likely to withstand market volatility better than being dependent on an SPV, especially one that may be exposed to currency risk.
  2. This sounds way more operationally feasible than the AM method. Launching an SPV might be possible right now, and you may even get a decent response because god knows markets will be looking to park funds right now – but like I said, I’m getting old, and would prefer a more conservative route.

And so Shashank, the answer to your question is that Ajit Ranade seems to be onto a pretty good idea, in my opinion. Which is not to say that the others aren’t, of course – but hey, if I didn’t force myself to choose, and write about my choice, how else to fill out a lockdown afternoon?

But on a more serious note, the “how” doesn’t  really matter as much as the when. And the correct answer to that question is “yesterday”.

 

 

 

Five articles I found informative

Andy Mukherjee on debt funds, Franklin Templeton and the regulatory mess that is about to get a whole lot worse:

Back then, Franklin Templeton’s unit holders probably had no idea their fund manager was sitting on practically the entire stock of zero-coupon debentures issued by Yes Capital Ltd., one of Kapoor family’s private investment vehicles. That was long before Yes, a major deposit-taking institution, became a basket case that was eventually rescued by a consortium led by government-controlled State Bank of India. The five funds that were involved in lending to Kapoor are among the six that have been suspended, suggesting that nothing really changed between then and now

Kurzarbeit. My word for the day. (I really should learn German)

He said Germany’s “Kurzarbeit,” or “short-time work,” program during the current pandemic has similarly set an example as to how deal with this economic crisis.

Under Germany’s system workers are sent home or see their hours slashed but are paid around two-thirds of their salary by the state.

China, India: follow the money!

Since 2014, an influx of Chinese capital in India has transformed the structure of India’s trade and investment relations with China. Until that year, the net Chinese investment in India was US$1.6 billion, according to official figures. Most of the investment was in the infrastructure space, involving major Chinese players in this sector, predominantly state-owned enterprises (SOEs). In the next three years, total investment increased five-fold to at least US$8 billion, according to data from the Ministry of Commerce (MOFCOM) in Beijing, with a noticeable shift from state-driven to market-driven investment from the Chinese private sector.

Bill Gates simplifies the development of the vaccine for all of us:

Safety and efficacy are the two most important goals for every vaccine. Safety is exactly what it sounds like: is the vaccine safe to give to people? Some minor side effects (like a mild fever or injection site pain) can be acceptable, but you don’t want to inoculate people with something that makes them sick.

Efficacy measures how well the vaccine protects you from getting sick. Although you’d ideally want a vaccine to have 100 percent efficacy, many don’t. For example, this year’s flu vaccine is around 45 percent effective.

TLTRO’s explained (this is a great read!)

A capital starved NBFC world will see churn, but sometimes the lack of capital itself will cause a company to fold, even if it has good credit. The RBI action for TLTRO may be good to create some liquidity for some NBFCs, but the system itself is weak and it may eventually need the RBI itself to step up and take some of the risk. A simple rule can be: We’ll fund you Rs. 100 as debt if you can raise Rs. 50 as additional equity capital from the market. But for now, we have TLTROs.

 

Notes from an excellent blogpost by V Ananta Nageswaran

I mean, the simplest thing to do would be to go read the post in its entirety. The notes that follow are my way of reinforcing the key messages for myself, but perhaps they will help you as well.

This piece has five messages. One is that the best way to attract businesses is not to repel them explicitly. Second, it makes the case for a bold but transparent fiscal support. Third, it offers suggestions on how that money could be spent and four, it reminds experts that doomsday scenarios for India are not pre-ordained. Finally, it is important that the government channels the Covid crisis to usher in a decade of better growth than the previous one.

With regard to the first point, about not repelling businesses:

  • The blog post emphasizes the need to facilitate clear instructions for businesses. The key message is that clear communication is always important, but it is literally a life-saver in these times. If you need to issue a clarification, you failed. It is that simple.
  • A related point in this regard comes from an excellent newsletter that is equally worth reading in its own right. Facilitating business also means not throwing out the baby with the bathwater:
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    “Now let’s look at why this is a policyWTF. India’s economy is facing a severe demand + supply shock. Of particular concern is the unavailability of domestic capital for long-term projects such as infrastructure (one of the reasons for this is covered in the India Policy Watch section below). Without long-term investment, India cannot achieve sustained economic growth. And without sustained economic growth, India’s geopolitical options get majorly constrained. An economically strong India becomes an ideal counterweight to China for the US and also an ideal market for excess Chinese capital. In contrast, a weak economy will eventually be forced to throw its economy open to the highest bidder at any point of time (ask Pakistan). Given this key national interest, making it difficult for Chinese investments to find their way into India is extremely counterproductive.”
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    To be clear, this is not the point Ananta Nageswaran was making, but the point that Pranay and A.N. make stems from the root principle that in these times, we need to facilitate business, not hamper it. It can be hampered by a variety of things: unclear communication, blanket bans, or something else.

Now, on to the second point:

However, for a country with a young demographic and a potential for economic growth to exceed the cost of capital in the medium to long-term, the cost of excessive caution and prudence would be higher than the cost of excess action now. This would be so in the medium to long-term even if the short–term costs of excessive fiscal activism appear higher. One such fear is the fear of credit-rating downgrade. That reputational risk must be accepted and ignored, if it materializes. Rakesh Mohan, the former Deputy Governor of the Reserve Bank of India, had the right attitude towards them. In an interview for CNBC TV-18, he is reported to have observed that the credit rating agencies should have been the first ones to be put on the lockdown globally. He is right.

There is a time to worry about rating agencies, rising rates of borrowing, crowding out and profligacy. This, however, is not that time. We can err on the side of doing too little, or too much. There will be errors, we just need to choose which. I agree with A.N. – more is infinitely more preferable.

Suggestions on how money can be spent, which is the third point:

  • Asset sales, by Andy Mukherjee (link gotten from within A.N.’s post)
  • Building out health infrastructure, by the same author (and the same source for the link as above too)
  • Shankkar Aiyyar has an article on BQ that finds mention in A.N’s post, and also has this excellent, excellent analogy:
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    “Epidemiology tells us vulnerability to Covid-19 rises with pre-existing conditions. This is true for economies too. India’s economy, frail from co-morbidity, tripped from slowdown to lockdown.”
  • And Vikram Chandra on Twitter has some suggestions:
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    Note that the list isn’t (and can’t be) exhaustive. But these are all extremely good suggestions!

Fourth, we need to keep reminding ourselves that it’s not all doom and gloom, health-wise and economy-wise, or as A.N. puts its, “experts are poor at predicting”. (Ahem)

And fifth, the bottomline from his blog-post, which I quote in its entirety:

“Finally, that persuades me to throw the ball to the government to play. In times of crises, society looks for guidance and leadership from the rulers. This is time-tested. Therefore, the onus is on the government to demonstrate clarity in thought and purpose in action. India began the last decade badly and ended it with more questions than answers. An encore will be a tragedy. India should do whatever it takes to avoid it.”

 

 

So what does stimulus actually mean?

A reader sends in this question:

“What do governments actually mean when they say that we’re going to announce a 1 trillion dollar economic stimulus package? Does it mean that they’re going to spend that much money? Or they’re just going to give it to the industries? (if so what does that entail?)”

Keep the following in mind:

  • I’m going to assume that the person who asked the question hasn’t learnt macroeconomics in a formal setting just yet, and will therefore answer the question accordingly
  • I will describe a macroeconomic model using words, and keep it fairly simple
  • I will use examples from earlier crises
  • Let’s get started!

 

  • Think of the Indian economy as a patient, and think of monetary and fiscal policies as medicines that are going to be administered by doctors. The RBI governor is a doctor to this patient, as is the Finance Minister.
  • Any move pertaining to regulation of banks (allowing banks to ask for EMI’s later, reduction of interest rates, forbearance of loans) is medicine administered by the RBI.
  • Any move pertaining to reduction of taxes, introduction of subsidies, amnesty schemes for taxes due in the past, spending on specific projects (construction of roads bridges etc), changes to government employees salaries/pensions, payouts to firms or individuals (literally giving them money) is medicine administered by the finance minister.
  • Under normal circumstances, one doctor is plenty enough. In fact, macroeconomists often end up saying that if fiscal policy is going to provide the medicine, monetary policy should stand ready to counteract any excesses.

    There is a dilemma as to whether these two policies are complementary, or act as substitutes to each other for achieving macroeconomic goals. Policy makers are viewed as interacting as strategic substitutes when one policy maker’s expansionary (contractionary) policies are countered by another policy maker’s contractionary (expansionary) policies. For example: if the fiscal authority raises taxes or cuts spending, then the monetary authority reacts to it by lowering the policy rates and vice versa. If they behave as strategic complements, then an expansionary (contractionary) policy of one authority is met by expansionary (contractionary) policies of the other.

  • But when the patient is as ill as is the case now (and is going to get sicker in the days to come!), well then monetary and fiscal policy are not substitutes: both need to be at play at the same time.
  • For example, in the 2008 recession, American policymakers resorted to both monetary and fiscal policy measures (all countries did, to be clear. I’m just using the American example because its data is easier to find and present)
  • The monetary policymakers announced, among other things, TARP. By the way, astute readers might want to point out that this seems to have been run by the Treasury Department, not the Federal Reserve. True, not arguing with that. It’s complicated! Also, watch this movie.
  • And, among other things, the American government also announced ARRA. The original website is no longer up, but you can see this, or read this.

 

Now, all that being said, we’re going to take a look at fiscal policy alone from here on in. It is not that monetary policy isn’t important (oh dear lord, it is!) but the question is more focused on fiscal policies.

To understand the answer to this question, let’s go back to an earlier post of mine, and quote from it:

Let’s break this tweet by Paul Krugman down.

  • The government has decided that it will give away money. Ergo, fiscal policy.
  • To whom should it give the money? It can give the money to firms, or to households.
  • If it gives the money to households (in India for example, this would have been through Direct Benefits Transfer), might that help people more?
  • Or should it give the money to firms instead?
  • Payroll taxes, which is what is being spoken about in the tweet, is tax paid on behalf of employees to the government, by firms. Here’s Wikipedia:

    Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their staff.[1] Payroll taxes generally fall into two categories: deductions from an employee’s wages, and taxes paid by the employer based on the employee’s wages. The first kind are taxes that employers are required to withhold from employees’ wages, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG) and often covering advance payment of income tax, social security contributions, and various insurances (e.g., unemployment and disability). The second kind is a tax that is paid from the employer’s own funds and that is directly related to employing a worker. These can consist of fixed charges or be proportionally linked to an employee’s pay. The charges paid by the employer usually cover the employer’s funding of the social security system, Medicare, and other insurance programs. It is sometimes claimed that the economic burden of the payroll tax falls almost entirely on the worker, regardless of whether the tax is remitted by the employer or the employee, as the employers’ share of payroll taxes is passed on to employees in the form of lower wages that would otherwise be paid.

  • So when there is a payroll tax holiday, firms no longer have to pay these taxes. So who is benefiting here? Firms or the employees of firms? To the extent that the firm no longer has to pay these taxes, it has more money with itself. It can either keep this money and use it for other things, or it can pass on this money to the employees. What will actually happen is tricky to predict, and trickier still to measure!
  • For example, imagine the Indian government says to the Gokhale Institute of Politics and Economics (GIPE) that the Tax Deducted at Source (TDS) from the professors salaries need no longer be given over to the government. (To people who know their macro, I know it is not the same thing. Treat this as an illustrative example)
    • If GIPE was due to pay me a 100 rupees every month, it would deduct 10 (that’s the TDS) and pass it on to the government. That need be done no longer.
    • But the government doesn’t say that this money should be given to the professors instead – GIPE can do with it whatever it wishes.
    • Will (should) GIPE pass on this money to the professors? Or use this to pay other people employed by GIPE? Or just keep it with GIPE (who knows when the college will reopen, hoarding cash may be a good idea). Or… anything else you can think of, really!
  • So “giving” to industries really can mean a variety of things. And it really depends on what industry chooses to do with this money. You could apply conditionalities and say you will only get the money if:
    • It’s passed on to employees
    • You qualify because your firm falls in an important sector (employs a lot of people, is important from a social viewpoint, is critical to combat the virus etc)
    • Anything else you can think of
  • Or the government could spend the money itself! Build roads, bridges, dams, employ thousands more teachers, temporary employees – but all of this is assuming we can control the spread of the virus, of course. Without that, all of this is difficult, if not impossible to achieve.

 


So the correct answer to the question that the reader asks is: all of the above. At this point in time, a good fiscal policy move will be to spend, and give tax benefits to firms and households. This is roll out the big guns territory, no half measures will do.

Homework:

A useful exercise to do: go through the fiscal stimulus announced by our government, and try and pinpoint which parts are directly in the hands of the people, which in the hands of the firms, and which is spending by government on building out infrastructure etc. Here’s one article to help you along.

Homework Part Deux:

Are we Rawlsian?

Homework Part Trois:

Are we Rawlsian enough?

 

MMT and the corona virus, courtesy Yash Agarwal

Yash Agarwal (here is his Twitter page) messaged yesterday, asking about MMT and whether it could be used to tackle the current crisis. He has shared a video as well, and asked a rather specific question, both of which we will get to shortly.

But first things first, what is MMT?

MMT stands for modern monetary theory. For there to be a “modern” monetary theory, there must have been a monetary theory, right?


 

OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy. So their budget policies should be entirely focused on getting the level of aggregate demand right: the budget deficit should be big enough to produce full employment, but no so big as to produce inflationary overheating.

The excerpt is from Krugman’s blog/column in the NYT, but if you want the academic paper behind this, here you go.

Here’s the short version of the Lerner argument: so long as you don’t borrow from abroad, and so long as you print your own money without any backing (such as gold), well, there can never be no crisis. Just, literally, print your money and throw it at the problem. The one thing you gotta keep in mind is you want to do this until aggregate demand is “just” right. Too much of AD, and you’re in inflationary territory. Too little and you never solved the crisis – print more money in that case.

So today, given the low interest rates that are likely to prevail in the economy, just have the finance minister and team spend, spend and spend, until aggregate demand rises and the economy is back on track. Build more schools, lay more roads, build more bridges – spend, spend and spend. That, best as I understand it, would have been the Lerner position.

And what about the debt and the deficit once things are back to normal? Well, that’s the problem with the Lerner doctrine. It involves running, then, a primary surplus – which means cutting subsidies and raising taxes. And no, I don’t see that happening.

If you want the modern version of this monetary theory, which is MMT, a good place to begin might be this blog post I wrote a while back.


But they key thing, best as I can tell, about MMT is that you must not worry about deficits, especially during a crisis. Print more money and spend your way out of it.

Here’s a more recent take on the issue:

The world is changing that is for sure. Governments around the world are promising to spend billions to address the coronavirus crisis and no-one (other than a few so-called progressives – see below) are talking about how governments will pay for the interventions. Everybody knows how. They have always known. The shams about governments not having enough money to provide adequate housing, schooling, health care, employment, other services, and a sustainable response to climate change are now exposed for all to see. The game is well and truly up. Everybody can now see that governments just have to announce billions of intervention and it will happen. Forget all the ‘complexity’ about accounting arrangements. Forget all the stuff that we will also drown under massive tax burdens if the government dares to help some disadvantaged person get a leg up in life. Forget all the stuff about bond markets punishing profligate governments with insolvency. Everybody can now see that the bond markets are the beggars and the government rules. Even in the Eurozone, it is obvious that the ECB is able to fund fiscal deficits of any size – ‘there is no limit’. Only the Modern Monetary Theory (MMT) economists have consistently outlined the rationale for what is going on at present. And that point is increasingly being recognised although not always in ways I think does our work justice.

That’s mostly rhetoric (and I do not mean that as a criticism), the meat is found later on in the article. In particular, note the 2×2 matrices that are to be found further down, of which I present one below:

Original can be found here

Essentially, MMT says that if a country has monetary sovereignty (and India does), and if a country has an aggregate demand crisis (and India does), then proceed full steam ahead with MMT. Go full steam ahead on expansionary fiscal policy, and don’t worry about finding the money to do this, or about the debt: just create the money!


 

Here’s Stephanie Kelton on the topic, in conversation with Michael Moore:

 

For a more theoretical look, especially at the operational aspects from a global viewpoint, read this article by William Buiter:

Much of the US response will come in the form of “helicopter money,” an application of Modern Monetary Theory (MMT) in which the central bank finances fiscal stimulus by purchasing government debt issued to finance tax cuts or public spending increases. The US economy is deteriorating at a spectacular rate, partly because of the direct health impact of the COVID-19 pandemic, but mostly as a result of social-distancing mandates that are preventing people from producing and consuming.


So ok, let’s say we’re going to do MMT: what exactly might this entail for, say, the USA?

What is more important is a set of policies that tackles the health crisis head-on while also mitigating the economic uncertainties faced by households and their communities. These include:
..
(1) full coverage of medical costs associated with testing and treatment of COVID-19;
..
(2) mandated paid sick leave and full coverage of associated costs;
..
(3) debt relief for families;

..
and (4) swift deployment of testing and treatment facilities to underserved communities. We will probably still need some demand stimulus, but these four steps require immediate attention.


I learnt about their article by reading about Amol Agarwal’s take on MMT, available here:

After being ignored (and humiliated), is this the MMTers moment in the sun? Will their ideas get a hearing? One would say that we should keep all options open and not be bound by the shibboleths of economics. The speed at which the pandemic has shifted gears and become an economic crisis needs all possible policies which need to be executed at even faster speed. My gut feel is most of the economies will eventually be implementing ideas from MMT without calling it so. The Governments are being pressed to introduce fiscal support and will be calling their central banks to finance the support. MMTers might not mind their not being given due recognition. First they are used to being ignored. Second, they may well think that as long as humanity benefits, a rose by any other name would smell as sweet.


Now (phew, that was a long introduction!) here’s the video that Yash shared:

And here’s his question:

I just watched this and I was wondering if it would be correct to state that the modern monetary theory is practically possible just for the United States of America since it issues the global reserve currency?

The answer is no: so long as you have your own currency (where the “you” in question is a sovereign government), and you are only borrowing domestically, you can go ahead with MMT.

And I agree with Amol Agarwal: right now, we need all the propping up of AD that we can get, and so we should do “whatever it takes”. And that right soon!

That doesn’t mean there won’t be problems later – there may well be – but now is about now. Spend!

Economic Policy Responses: What are India’s options?

V. Anantha Nageswaran and Gulzar Natarajan write in the Swarajyamag about what India’s policy responses can be. They advise erring on the side of too much, rather than too little:

…the nature of the crisis threatens to create economic, social and health distress among the low-income and poor households. This can have potentially adverse consequences for social and economic stability for many years to come.

Therefore, Indian policymakers have not much to lose by tearing up the conventional playbook. The risk-reward ratio is in favour of being bold rather than timid.

Even if they are not as effective or, worse, even if they backfire, history will not judge them harshly for trying harder and unconventionally to support the economy now.

Please go through the entire article carefully, it is worth your time.

Niranjan Rajadhakshya informs us about the history of quantity planning in India.

Just consider some of the key questions that are being asked right now. How many ventilators are available? Are there ample food stocks? Can more hospital beds be made available? How many masks be produced in the next few weeks? Can the production of testing kits be ramped up? It’s all about quantities, quantities, quantities.

P Sainath has some suggestions (they come towards the end of this article)

The very first thing that needs doing: preparing for emergency distribution of our close to 60 million tons of ‘surplus’ foodgrain stocks. And reaching out at once to the millions of migrant workers and other poor devastated by this crisis. Declare all presently shut community spaces (schools, colleges, community halls and buildings) to be shelters for stranded migrants and the homeless.

Shankkar Aiyar in The New Indian Express on the triage of relief, rescue and recovery.

And finally, Gautam Chikermane with 10 different suggestions, of which I find the last one to be currently dramatically under-rated:

Embed entrepreneurs and managers in crisis management. The corporate sector is not just about money or physical infrastructure. It is equally about infusing efficiency in projects, operations, crises management, innovation and entrepreneurship – that’s how they are trained, that’s what they do, that’s who they are. While hard money will flow easily, this expertise must not be held back by turf or administrative frictions. Patriotism doesn’t have a net worth and is not restricted to one sector (the government) alone. A start can be made by setting up a task force of technology entrepreneurs and big businesses that can support government initiatives with knowledge and insights.

On the Constitutional Validity of the Lockdown

A reader had written in asking about the constitutional validity of the lockdown, which I attempted to answer in this blog post.

Bharat Vasani and Samiksha Pednekar, writing in the Bloomberg Quint, help us understand just how the lockdown was enforced:

Constitutionally, the state government is empowered to deal with matters related to public order and public health, listed in the state list Entry 1 and 6, respectively. However, Entry 29 of the Concurrent List empowers the central and state governments to legislate on matters pertaining to the prevention of an infectious or contagious disease spreading from one state to another.

There is much more at the link, all worth reading if you are interested in the legal aspects of the lockdown.

Also, and this is important:

Here is the link, and if you ask me, this is worth a bookmark.

Links you might like to read about India and the corona virus

Prachi Singh, Shamika Ravi and Sikim Chakraborty run the numbers on India’s health infrastructure, and the results are less than perfect:

In this piece we focus on availability of government hospital beds for major states in India. Using data from National Health Profile–2019, we observed that there are 7,13,986 total government hospital beds available in India. This amounts to 0.55 beds per 1000 population. The elderly population (aged 60 and above) is especially vulnerable, given more complications which are reported for patients in this age group. The availability of beds for elderly population in India is 5.18 beds per 1000 population.

The Print has an analysis of the people in the taskforce handling the crisis at the very top.

The Ken had a story some days ago about testing in India (you’ll need to sign in to read it). Hopefully, the situation is better now.

Jean Dreze has some suggestions about tackling the economic impact of the lockdown, particularly the poorest sections of Indian society.

as does Reetika Khera.